On pursuits, predictions, and opportunities (or my semi-review of Taleb’s Black Swan)

One of the most influential book in my life I’ve had the fortune to come across is Nassim Nicholas Taleb’s bookThe Black Swan: The Impact of the Highly Improbable’. I recently reread it and thought a review would be fun.

If I had to sum up the book in one sentence (albeit a long one), it’s about our inability to properly account for outlier events (Black Swans) due to the intractable human shortcomings of being short-sighted and biased.

Two worlds, predictions, and silent evidences

Going through the book, I feel that it is designed to be as accessible and entertaining as possible (with a section reserved for all the nitty-gritty stuff). In it, Taleb frequently uses anecdotes and analogies to better explain his otherwise involved concepts.

For example, try imagining two starkly different world; Mediocristan and Extremistan. In Mediocristan, everything is predictable and works according to the Gaussian distribution. If I was able to gather 10 people of varying height for example, you could safely say that an additional person would not change the average height by much. There is zero possibility that any of them are taller than 10 meters. This is the main property of Mediocristan, an increase in sample size does not affect the average by much. Conversely, in Extremistan a sample size increase may significantly change the average (e.g: wealth, fame, etc). Think you and Bill Gates being in the same room :). Taleb opines that one of the pitfalls of numerous modern fields is how often we model the world in a Mediocristan manner (with Economics as its main culprit. It’s quite entertaining how often Taleb bashes it), when in fact we are much closer to Extremistan. This is one of the properties of Black Swans, they only exist in things with Extremistan properties.

The term black swan itself is popularized by Hume, who presented this argument; We cannot fully prove that every extant swan is white simply by observing numerous white swans, we can only disprove the fact by way of observing a swan that is not white in color, a black one for example. This property also extends to Taleb’s Black Swan, that is, inductive reasoning (cause-effect reasoning) should be viewed with caution as it cannot be applied to Black Swans. Only in isolated and “game” environments (dice play, coin flips, etc.) does it work reasonably well. The real world however, is a wholly different story.

We tend to tunnel to specific issues, without accounting for extreme events that are beyond our knowledge or “things we do not know that we do not know”. This concept is what is meant by the titular Black Swan, an event so out of the box, we cannot even conceive of it happening to begin with. An interesting anecdote about a certain casino was provided by Taleb. On a conference trip, Taleb was joined by a casino manager who explained to him the sophisticated cheat prevention system they use to minimize losses. But it turns out that the largest losses in the casino’s operations haven’t been coming from things you would typically associate with casino loss (card counting, instrument manipulation, poor luck, etc.). First, the casino lost about $100 million after an irreplaceable performer was attacked by the performer’s tiger. Second, a disgruntled contractor tried to bomb the casino by putting dynamites in its basement. See, real world issues cannot be forecast using the risk models we commonly use since there are too many avenues of risk to begin with. This tendency to oversimplify is what Taleb dubs the “ludic fallacy”.

Another interesting issue Taleb talked about is how futile it is to try and explain the Whys in history. Humans prefer finite stages that are sorted chronologically to explain the machinations of historical events. This preference is understandable as it compresses information. Imagine having a text filled with escalating numbers or any numbers with a discernable pattern (e.g: 1,2,3,4,etc) and another filled with random numbers, obviously it’s easier to disseminate and recall the former. Taleb dubs this human conceit as the “narrative fallacy”. The only thing we’re actually good at is assigning causes and effects without empirical evidence (confirmation bias). We cherry pick things and weave a story that somehow conveniently causes the event.

Further, “backward” prediction is much harder than “forward” prediction. The example Taleb gave is that of a melting ice cube. When observing an ice cube, it is trivial to predict that it’ll turn into a puddle soon enough, yet when we see a puddle, there is no possibility for us to predict the shape of the initial ice cube. Ergo, it is possible to create an algorithm which makes it exceedingly hard for us to predict input according to its output (like a hash table), which makes it impossible to predict future events empirically, as we have no valid evidence base.

There is mounting evidence of our inability to forecast complex events. I first encountered this issue after discovering a paper analyzing the performance of investment firms. Virtually none maintained their edge towards market performance. They may be good this year or the next, but none were able to constantly beat the market. Tons of so-called experts pretend that their forecast actually mean something, but they don’t hold up in in the real world. Obviously some are actually experts (think physicists, mathematicians, engineers, etc; The “know-how” experts) but a considerable amount are not (think economists, political scientists, etc; The “know-what” experts). I think it’s ridiculous how much ignorance we’re able to conceal simply by using jargons, wearing suits, and saying things confidently. How great would it be if we live in a society where saying I don’t know is a socially accepted response and humbleness is of utmost importance in lieu of unfounded confidence.

Not long ago, I myself worked at a financial firm in Jakarta. It’s quite conventional, if filled with a higher proportion of workaholics than other firms I’ve gotten to know. There, I’ve come to realize that being/appearing busy and not actually knowing things are not mutually exclusive. A lot (but not all) of the things done is busybody work that is only there to please certain people, and I do sense that the people doing it actually realize the fact. It’s fairly straightforward to see how much useless forecasting is being done in the business world. Most firms formulate their strategy from the estimated future economics of a country, but a simple historical comparison will yield the fact that these estimates are highly inaccurate and is basically counterproductive.

Another salient point in the book is that of silent evidences. The old Roman story goes that a long time ago Diagoras the atheist were shown pictures of worshippers who prayed and survived a subsequent shipwreck. The implication being that praying somehow protects your from drowning. Diagoras asked “Where were the pictures of those who prayed and then drowned?”. The dead being dead, it would be hard for them to advertise their survival. Silent evidences are something that we commonly overlook in our arguments and it can conceal randomness with ease if we are not careful. Everyday I scroll through the internet and never fail to find these types of articles “the 5 characteristics of billionaires” or “what millionaires do before starting their day”. Somehow it fools us by implying that they have certain set of characteristics which made them billionaires in the first place. Only rarely do we check the graveyard of non-billionaires, which may actually show that they have the same attributes sans the luck (or not! the only way to prove this would be empirically).

Pursuits

Now what I find very alluring from the book is how much of this high-level principle is applicable in our approach to life.

In career for example, you could either go the Extremistan way (or what we commonly say a ‘scalable’ profession) or the Mediocristan way (‘unscalable’ profession). Unscalable professions might include surgeons, plumbers, and bakers; generally those that require you to be physically present and depend on physical actions. Scalable professions on the other hand, might include celebrities, entrepreneurs, singers, and writers; professions that only require dissemination of ideas or products without being physically present. Of course, there is no hard line dividing the two. A century ago, being a singer is unscalable but advancements in technology has converted it into yet another winner-take-all profession. The scale tips disproportionately to the other end. You are either selling records or an underpaid singing teacher at a local high school.

Humans are scientifically proven to be biologically wired with a predisposition towards Mediocristan pursuits. Constant, mediocre bounties suit our brain’s reward system better as our primal instincts generally do not prefer delayed gratification. Those working on Extremistan professions (or considering going over) need to realize that even their biological systems are against them.

Only very rarely does one pursue Extremistan passions without weathering long bouts of disappointments, both financially and socially. Respect and acknowledgement is as much a currency as financial reaps are with regards to personal satisfaction, if not more. A researcher slaving in the lab sans results are not what we traditionally have in mind when imagining a Nobel Prize winner. I leave you with this wonderful excerpt from the book (which I believe to be semi-autobiographical) that has left quite an impression in me:

Every morning you leave your cramped apartment in Manhattan’s East Village to go to your laboratory at the Rockefeller University in the East Sixties. You return in the late evening, and people in your social network ask you if you had a good day, just to be polite. At the laboratory, people are more tactful. Of course you did not have a good day; you found nothing. You are not a watch repairman. Your finding nothing is very valuable, since it is part of the process of discovery — hey, you know where not to look. Other researchers, knowing your results, would avoid trying your special experiment, provided a journal is thoughtful enough to consider your “found nothing” as information and publish it. Meanwhile your brother-in-law is a salesman for a Wall Street firm, and keeps getting large commissions — large and steady commissions. “He is doing very well,” you hear, particularly from your father-in-law, with a small pensive nanosecond of silence after the utterance — which makes you realize that he just made a comparison. It was involuntary, but he made one. Holidays can be terrible. You run into your brother-in-law at family reunions and, invariably, detect unmistakable signs of frustration on the part of your wife, who, briefly, fears that she married a loser, before remembering the logic of your profession. But she has to fight her first impulse. Her sister will not stop talking about their renovations, their new wallpaper. Your wife will be a little more silent than usual on the drive home. This sulking will be made slightly worse because the car you are driving is rented, since you cannot afford to garage a car in Manhattan. What should you do? Move to Australia and thereby make family reunions less frequent, or switch brothers-in-laws by marrying someone with a less “successful” brother? Or should you dress like a hippie and become defiant? That may work for an artist, but not so easily for a scientist or a businessman. You are trapped. You work on a project that does not deliver immediate or steady results; all the while, people around you work on projects that do. You are in trouble. Such is the lot of scientists, artists, and researchers lost in society rather than living in an insulated community or an artist colony.

Have any of you felt this way? As someone trying to eschew traditional career paths, I have (and ironically I’ve also been on the other end). We fail to realize that ‘non-results’ are also something to behold. It narrows the spectrum of possibilities to explore. Unfortunately enough, all the praises go to people lucky enough to ‘discover’ something. But please do not be discouraged, as all credit goes to the man in the arena. As Taleb have mentioned in the book, I find that in order to minimize that little spasms of pain and discouragement, people toiling in Black Swan professions would be well advised to find company of others in a similar position. I can’t help but think how much better the world would be if we all could see a person’s pursuit through another prism. It’s no wonder traditionally prestigious career paths (generally) attract a disproportionate amount of duller people, ones highly risk-averse and ultra-conforming. I’m not saying this makes anyone less of a good person, I would be remiss to judge people by such superficial qualities, but I believe this predisposition does exist.

Applications

More generally, here are some advice Taleb provided which will exploit the Black Swan principle to our advantage;

  1. Make a distinction between positive and negative Black Swan exposures in any endeavors. Working as a writer provides exposure to positive Black Swan events, outlier events will often benefit your book sales/readership. Conversely, banks are exposed to negative Black Swans. When the customer does well in business there is no expectations for them to pay the bank more interest, but in cases of wide economical distress non-performing loans will inevitably rise dramatically.
  2. Don’t look for the precise and local. As a researcher/experimenter/entrepreneur (all Black Swan professions), be open-minded and try to explore as many possibilities as possible. Think Alexander Fleming accidentally discovering Penicillin.
  3. Seize anything that looks like opportunity. It’s baffling how often we fail to exploit opportunities coming our way. When a prospective investor invites you to go out for a drink after a hard day’s work, cancel anything on your schedule, the opportunity may never come again. Louis Pasteur once said that luck comes to those who are prepared.

There are a couple more gems in there, but I believe these 3 concepts are the ones most applicable in our daily life.

Closing notes

Taleb’s Black Swan is a highly recommended read if you would like to further explore some of the issues mentioned in this piece. It’s very enlightening and the concepts can be applied to basically any real life issues. Yes, he can be quite preachy and sometimes arrogant, but it’s definitely worth a read whatever your genre inclination is. Quite hard to find in Indonesia, but it’s readily available in e-book format should you be interested.

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